As discussed in an earlier alert, the Corporate Transparency Act (“CTA”) went into effect January 1, 2024, requiring most legal entities in the United States to file a beneficial ownership information report (“BOI Report”) with the U.S. Financial Crimes Enforcement Network (“FinCEN”). Before January 1, 2025, all covered entities must file a BOI Report through FinCEN’s electronic filing system.
This alert summarizes the CTA rule and highlights some best practices for reporting companies moving forwards. Please contact us for more information.
Reporting Companies and Beneficial Owners
Absent an exemption, the CTA broadly applies to the following entities (“Reporting Companies”):
- Domestic entities created by filing formation documentation with a state's secretary of state or similar office under the laws of a US State or Indian Tribe, including limited liability companies and corporations.
- Foreign entities registered to do business in the U.S. by filing documentation with a state's secretary of state.
Reporting Companies must file a BOI Report with FinCEN containing information about the Reporting Company, as well as individuals who:
- Own or control at least 25% of the Reporting Company’s ownership interests.
Ownership interests include, but are not limited to: equity, stock or voting rights; a capital or profit interest; convertible instruments; options; and any other instrument, contract, or other mechanism used to establish ownership. Ownership interests must be calculated on a fully converted and fully diluted basis.
- Exercise substantial control over the Reporting Company.
Individuals with substantial control include, but are not limited to:
- Senior officers and individuals performing the functions of a senior officer;
- Persons with authority over appointment/removal of officers or a majority of the board of directors; or
- Persons with “substantial influence” over “important decisions” of the Reporting Company, including its lease/sale of assets, corporate structure, major expenditures, selection/termination of business lines or geographic focus, senior officer compensation schemes, significant contracts, and amendments of substantial governance documents.
Additionally, Reporting Companies formed after December 31, 2023 must report their "company applicants." Company applicants are the companies/individuals that file or decide to file the formation/registration documents with a secretary of state on behalf of the Reporting Company. This may include, for example, the Reporting Company’s attorneys (and their paralegals) and business formation service providers.
Exemptions
The CTA exempts the following 23 types of entities from the CTA’s reporting requirements:
- Public companies;
- Governmental authorities;
- Banks;
- Credit unions;
- Depository institution holding companies;
- Money services businesses;
- Brokers or dealers in securities;
- Securities exchanges and clearing agencies;
- Other Exchange Act registered entities;
- Investment companies or investment advisers;
- Venture capital fund advisers;
- Insurance companies;
- State-licensed insurance producers;
- Commodity Exchange Act registered entities;
- Accounting firms;
- Public utilities;
- Financial market utilities;
- Pooled investment vehicles;
- Tax-exempt entities;
- Entities assisting a tax-exempt entity;
- Large operating companies;
- Subsidiaries of certain exempt entities; and
- Inactive entities.
BOI Reports
Reporting Companies must disclose three (3) sets of information in a BOI Report:
- The following information about the Reporting Company:
- Full legal name;
- Trade name and DBAs;
- Business street address of the reporting company’s primary location in the United States where it conducts business;
- Jurisdiction of formation and/or registration; and
- Company IRS Tax ID Number or a foreign tax identification number.
- The following information about beneficial owners of the Reporting Company:
- Full legal name;
- Date of birth;
- Current residential address;
- Unique identifying number from an acceptable ID document; and
- Image of the ID document.
- The same information about company applicants as is required to be filed regarding beneficial owners.
Compliance Deadlines
Initial Reports
Reporting Companies must file an initial BOI Report according to the following deadlines:
- Reporting Companies that were formed or registered to do business after January 1, 2024 but before January 1, 2025 are already required to file a BOI Report within 90 days after such formed/registration.
- Reporting Companies that were created or registered to do business before January 1, 2024 must file an initial report before January 1, 2025.
- Reporting Companies that are formed or registered to do business after January 1, 2025 must file an initial report within 30 days after such creation or registration.
Ongoing BOI Reports
Reporting Companies must update or correct their BOI Reports as follows:
An exempt entity that loses its exemption under the CTA must report the required information within 30 days of losing the exemption.
Reporting Companies must correct any inaccurate information and file updated reports within 30 calendar days of becoming aware or having reason to know that the reported information is inaccurate.
- Changes in Reporting Companies.
Reporting Companies must file updated information within 30 calendar days of a change in such information.
Penalties
Noncompliance may result in the following penalties:
- For willful failure to report or willfully providing false information/documentation:
- civil penalty of up to $500 per day,
- criminal fine of $10,000, and
- up to 2 years in prison.
- For knowingly disclosing or using BOI Information for an unauthorized purpose:
- civil penalty of $500 per day,
- criminal fine of up to $250,000, and
- up to 5 years in prison.
Access to BOI information
Information contained in BOI Reports is maintained in a federal database. Federal, State, local, and Tribal officials, as well as certain foreign officials who submit a request through a U.S. Federal government agency, are permitted to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. Financial institutions also have access to beneficial ownership information in certain circumstances, with the consent of the reporting company.
Best Practices
The CTA and its implementing Rule present sweeping changes to entity formation practices in the U.S. Further, given the potential penalties for noncompliance, Reporting Companies should:
- To the extent possible, maintain a list of their beneficial owners and company applicants.
- Update their corporate governance practices and governing instruments to ensure that their beneficial owners:
- Are required to provide their CTA information to the company in a timely manner; and
- Are liable and will indemnify the Reporting Company for inaccurate information, or information that the beneficial owner fails to update with the Reporting Company in a timely manner.
Additionally, if the Reporting Company’s beneficial owners are also beneficial owners of multiple other entities, those beneficial owners should file to receive a “FinCEN identifier.” The beneficial owners can then provide other Reporting Companies their FinCEN identifier instead of having to provide their personal information.
Michael Best has attorneys who can advise companies on the CTA, including by determining their exemption status and beneficial owners. Michael Best also works with the officers and third-party filing providers who submit BOI Reports on behalf of the covered entities.
For additional information, please also see the information below: